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Chicago Fed: Economic Growth Slowed In January

  • Written by Syndicated Publisher No Comments Comments
    February 26, 2014

    “Index shows economic growth slowed in January”: Was is the headline for Monday’s release of the Chicago Fed’s National Activity Index, and here are the opening paragraphs from the report:

     

    Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to -0.39 in January from -0.03 in December. Two of the four broad categories of indicators that make up the index decreased from December, and two of the four categories made negative contributions to the index in January.

    The index’s three-month moving average, CFNAI-MA3, decreased to +0.10 in January from +0.26 in December, marking its fifth consecutive reading above zero. January’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.

    The CFNAI Diffusion Index decreased to +0.11 in January from +0.28 in December. Forty-one of the 85 individual indicators made positive contributions to the CFNAI in January, while 44 made negative contributions. Forty-one indicators improved from December to January, while 44 indicators deteriorated. Of the indicators that improved, ten made negative contributions. [Download PDF News Release]

     

    The latest headline index at -0.39 came in well below the Investing.com forecast of -0.20.

    The Chicago Fed’s National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed’s website. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth. Negative values indicate below-average growth, and positive values indicate above-average growth.

    The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity. I’ve added a high-low channel for the MA3 data since 2010. As we can see, the MA3 of the index hit the top of the channel two months ago and has now logged its second month of lower values.

     

     

    For a broad historical context, here is the complete CFNAI historical series dating from March 1967.

     

     

    The next chart highlights the -0.7 level. The Chicago Fed explains:

     

    When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

     

    The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

     

     

    The next chart includes an overlay of GDP, which reinforces the accuracy of the CFNAI as an indicator of coincident economic activity.

     

     

    Here’s a chart of the CFNAI without the MA3 overlay — for the purpose of highlighting the high inter-month volatility. Consider: the index has ranged from a high 2.65 to a low of -4.93 with a average monthly change of 0.61. That’s 8% of the entire index range! The latest reading is a month-over-month change is 0.53, a tad below than the mean change.

     

     

    Further underscoring the volatility is the roller-coaster list of CFNAI monthly headlines from 2011 forward.

     

     

    As the monthly chart depicts and the headline verbs reinforce, it’s unwise to read very much into the data for any specific month. Also data revisions frequently make the real-time headline subsequently inaccurate. The 3-month moving average is a better number to watch.

    The Long-Term Economic Trend

    In the final chart I’ve let Excel draw a linear regression through the CFNAI data series. The slope confirms the casual impression of the previous charts that National Activity, as a function of the 85 indicators in the index, has been declining since its inception in the late 1960s, a trend that roughly coincides with the transition from a good-producing to a post-industrial service economy in the information age.

     

     

    For a more detailed perspective on long-term economic trends, see my latest Understanding the CFNAI Components, which I update and post a few hours after the CFNAI is released.

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.
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